Corporate Bonds

Discussion of the Bond portion of the Permanent Portfolio

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Corporate Bonds

Post by Cortopassi » Tue Oct 25, 2022 8:12 pm

Taking the other topic on TIPs to corporate bonds, I would be interested in thoughts about whether you'd invest in a Make Whole bond of durations from 37 to 75 years (!!) on companies like Amgen, Waly Disney and Altria.

These are paying coupon rates from 6.2 to 8.125% and YTM of 6.2 to 7.3%.

These are Make Whole bonds, so instead of being callable, the issuer can buy them back at any time but have to pay the interest that would have been gained through maturity as well as the principal.

Is there room in a portfolio for some risk on corporate bonds? 100k in Amgen at 8.125% is $8125 a year, for the next 75 years....for example.

I am a noob still in understanding bonds, so would love to hear the negatives.

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Re: Corporate Bonds

Post by vnatale » Tue Oct 25, 2022 8:43 pm

Cortopassi wrote:
Tue Oct 25, 2022 8:12 pm

Taking the other topic on TIPs to corporate bonds, I would be interested in thoughts about whether you'd invest in a Make Whole bond of durations from 37 to 75 years (!!) on companies like Amgen, Waly Disney and Altria.

These are paying coupon rates from 6.2 to 8.125% and YTM of 6.2 to 7.3%.

These are Make Whole bonds, so instead of being callable, the issuer can buy them back at any time but have to pay the interest that would have been gained through maturity as well as the principal.

Is there room in a portfolio for some risk on corporate bonds? 100k in Amgen at 8.125% is $8125 a year, for the next 75 years....for example.

I am a noob still in understanding bonds, so would love to hear the negatives.

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Bonds are only as good as the company issuing them.

I think the original Dow Jones 30 was created in the late 1890s? By about 2000 General Electric was the only company still in existence.
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Re: Corporate Bonds

Post by Cortopassi » Tue Oct 25, 2022 9:48 pm

Definitely something to think about!
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Re: Corporate Bonds

Post by coasting » Tue Oct 25, 2022 11:04 pm

Cortopassi wrote:
Tue Oct 25, 2022 8:12 pm
Taking the other topic on TIPs to corporate bonds, I would be interested in thoughts about whether you'd invest in a Make Whole bond of durations from 37 to 75 years (!!) on companies like Amgen, Waly Disney and Altria.

These are paying coupon rates from 6.2 to 8.125% and YTM of 6.2 to 7.3%.

These are Make Whole bonds, so instead of being callable, the issuer can buy them back at any time but have to pay the interest that would have been gained through maturity as well as the principal.

Is there room in a portfolio for some risk on corporate bonds? 100k in Amgen at 8.125% is $8125 a year, for the next 75 years....for example.

I am a noob still in understanding bonds, so would love to hear the negatives.

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Harry Browne specified nominal long term US Treasurys for the bond allocation / deflationary environment (1) because there was no credit risk - the government can always print to repay the debt, and (2) because they are not callable - unlike Mortgage Backed Securities that may have no credit risk due to implicit or explicit government backing but have call risk as they can be repaid early if rates fall thus forcing you to reinvest at lover yield.

HB did make an exception for those with moral objection to loaning money to the government. He suggested a sub-optimal substitute of nominal long term non-callable US dollar denominated high quality investment grade corporate bonds instead. This introduces some credit risk since the company cannot print to repay, so must go with highest rated bonds to minimize the risk. Also, the corporate bonds behavior may not be as "anti-correlated" to other assets in certain economic environments as compared to US Treasurys.

I have no concern purchasing US Treasurys, so I stick with that. If moral conflict were to arise, or if I were to say consider corporate bonds for Variable Portfolio, I would prefer to use bond fund rather than individual bonds (1) because, unlike highly liquid US Treasurys, I understand that the pricing for corporate bonds on the secondary market can be predatory for small lot retail investors, but institutions can buy/sell efficiently, and (2) a bond fund will spread credit risk across many companies instead of one or a few.

From your post, I gather you are interested in the Make Whole bonds due to additional yield, not due to moral issue loaning money to US government. I suppose the Make Whole feature addresses the call risk. Besides the concerns I listed above regarding individual bonds, I note the Moody's rating from the screenshot for Amgen is BAA1. While this is still considered "investment grade" by Moody's, it is listed 8th place in that category - see https://www.moodys.com/sites/products/p ... 408_ki.pdf
Per Moody's rating chart: Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess speculative characteristics.

Also, based on that quote screenshot, wouldn't the price be $127K to get $8125 per year in income? The coupon may be 8.125%, but you will have to pay more than par to buy the bond. I believe the quote is saying you will get yield of 6.376% based on that price.
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Re: Corporate Bonds

Post by Kbg » Wed Oct 26, 2022 9:08 am

I don't think these make much sense for an individual investor unless they are doing so as a speculative venture.

Given they can be called, you know they will be as soon as circumstances are such that would become more advantageous to you than the company issuing them for the risk being taken. A they have to payout the full amount of interest the circumstances would likely be quite "interesting" economically for that to happen. Also, given the price of the bond you are getting a coupon of 8.125% but that is not the yield you are getting which is the all things being equal metric to use when evaluating bond options.

The main negative for these bonds is the huge duration which means they are going to reprice bigtime for any interest rate moves such that if you wanted to offload them you may have to do so at a significant loss. Then there is what Vinny brought up...will the company be around that long? It's almost a certainty that you will not, which means these holdings will almost certainly be sold by you or your estate.

Currently, VCLT shows a 5.9 YTM and a 30 Day SEC yield of 6.2% with a 13 year duration (and is down over 30% this year). You are getting pretty close to the same yield, diversification benefits/safety and the duration is probably more appropriate for your remaining lifespan.

In sum, not a great investment. But if for some reason you want to lock in a 6.376 YTM for the next 75 years and take on the company risk, who am I to say it's a bad speculative venture?
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Re: Corporate Bonds

Post by jalanlong » Wed Oct 26, 2022 10:18 am

vnatale wrote:
Tue Oct 25, 2022 8:43 pm
[
I think the original Dow Jones 30 was created in the late 1890s? By about 2000 General Electric was the only company still in existence.
That is very misleading. That implies that most of the others went out of business which is not true, Most of them merged or were purchased by other companies. For example, Union Carbide was a Dow original. It is now owned by Dow Chemical. American Cotton Oil is now part of Unilever. Chicago Gas is now part of Integrys Energy. Only 1 company out of the original Dow 12 (US Leather) actually went out of business.
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Re: Corporate Bonds

Post by Cortopassi » Wed Oct 26, 2022 12:06 pm

Kbg wrote:
Wed Oct 26, 2022 9:08 am
I don't think these make much sense for an individual investor unless they are doing so as a speculative venture.
I was just intrigued by the durations that were available. I had no idea so many were around with >30 year durations.

As for the speculation part, part of me is definitely interested in taking on some "non-stock" market risk in small bites over the next few months, if I can find some 6+% YTMs on corp bonds, and buy small amounts over a larger # of companies to mitigate the risk of any one company going belly up.
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Re: Corporate Bonds

Post by dualstow » Wed Oct 26, 2022 12:21 pm

Cortopassi wrote:
Tue Oct 25, 2022 8:12 pm
Is there room in a portfolio for some risk on corporate bonds? 100k in Amgen at 8.125% is $8125 a year, for the next 75 years....for example.
You also want to check if there’s a survivor option.
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Re: Corporate Bonds

Post by Cortopassi » Wed Oct 26, 2022 3:33 pm

dualstow wrote:
Wed Oct 26, 2022 12:21 pm
Cortopassi wrote:
Tue Oct 25, 2022 8:12 pm
Is there room in a portfolio for some risk on corporate bonds? 100k in Amgen at 8.125% is $8125 a year, for the next 75 years....for example.
You also want to check if there’s a survivor option.
Do you mean some sort of corporate level survivor option if the company gets bought?
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Re: Corporate Bonds

Post by dualstow » Wed Oct 26, 2022 6:20 pm

Cortopassi wrote:
Wed Oct 26, 2022 3:33 pm
dualstow wrote:You also want to check if there’s a survivor option.
Do you mean some sort of corporate level survivor option if the company gets bought?
I mean your spouse. I believe that all treasuries will just be inherited like stocks. If a corporate bond doesn’t have a survivor option, it means the whole bond goes poof* when you pass away. I’m not 100% sure but I am fairly sure I read this in my bond book once upon a time. If I buy anything more than five years out, I make sure there’s a survivor’s option.

*EDIT: well, yes and no. It doesn’t go poof, but…read here
https://www.investopedia.com/terms/d/deathput.asp
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Re: Corporate Bonds

Post by barrett » Thu Oct 27, 2022 6:07 am

Because these higher yielding corporate bonds tend to default more frequently, isn't it better (or at least less nerve wracking) to just stick with investments backed by the people with the printing press? I mean, those higher yields are there for a reason, right? If a bond portfolio of near junk consistently beat Treasuries, wouldn't every investor opt for the corporate bonds, assuming they have enough money to spread that risk around a bit?

For my fixed-income slice, I am trying to diversify by holding a bunch of I-Bonds in additional to nominal Treasuries, but also seriously considering adding some TIPS now that they finally have a decent positive real yield.

And, for the record, I am a bond noob too. I guess I just don't see that there's such an obvious reward for taking on the added risk of corporates.

I also had no idea that companies were issuing such long-duration bonds. Damn, those must be super volatile.
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Re: Corporate Bonds

Post by Cortopassi » Thu Oct 27, 2022 8:36 am

barrett wrote:
Thu Oct 27, 2022 6:07 am
Because these higher yielding corporate bonds tend to default more frequently, isn't it better (or at least less nerve wracking) to just stick with investments backed by the people with the printing press? I mean, those higher yields are there for a reason, right? If a bond portfolio of near junk consistently beat Treasuries, wouldn't every investor opt for the corporate bonds, assuming they have enough money to spread that risk around a bit?

For my fixed-income slice, I am trying to diversify by holding a bunch of I-Bonds in additional to nominal Treasuries, but also seriously considering adding some TIPS now that they finally have a decent positive real yield.

And, for the record, I am a bond noob too. I guess I just don't see that there's such an obvious reward for taking on the added risk of corporates.

I also had no idea that companies were issuing such long-duration bonds. Damn, those must be super volatile.
I just got a book from the library about bonds, and how company bonds thought nearly totally secure had problems in the financial crisis.

I see everyone's point on the risk, it really was more of an eye opener that these existed and have such high rates.

Would you all agree in terms of risk that corp bonds would fall in the middle here?

High Risk to Lower Risk:
--Individual common stock
--Preferred stock
--Stock ETFs/funds
--Corp bonds
--Muni bonds
--CDs/Savings accounts
--US Treasuries
--Physical gold (not sure it is the lowest risk, just wanted to list it)

So, I'm not putting 100% of my net worth in any of these, but, for example, if I was willing to put $10,000 in Walt Disney stock, would/should I not be as willing to put $10,000 in Walt Disney bonds?
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Re: Corporate Bonds

Post by dualstow » Thu Oct 27, 2022 4:30 pm

barrett wrote:
And, for the record, I am a bond noob too. I guess I just don't see that there's such an obvious reward for taking on the added risk of corporates.
I know an Asian art dealer who said she had a really good customer who used to pay with a checkbook from Lehmann Bros. She hasn't come around lately...
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Re: Corporate Bonds

Post by Hal » Thu Oct 27, 2022 6:55 pm

Cortopassi wrote:
Thu Oct 27, 2022 8:36 am

Would you all agree in terms of risk that corp bonds would fall in the middle here?

High Risk to Lower Risk:
--Individual common stock
--Preferred stock
--Stock ETFs/funds
--Corp bonds
--Muni bonds
--CDs/Savings accounts
--US Treasuries
--Physical gold (not sure it is the lowest risk, just wanted to list it)

So, I'm not putting 100% of my net worth in any of these, but, for example, if I was willing to put $10,000 in Walt Disney stock, would/should I not be as willing to put $10,000 in Walt Disney bonds?
Maybe have a read of Ben Graham again....
https://sps.columbia.edu/news/note-benj ... -valuation

With regards to your list. If you are defining risk as volatility, then with the exception of golds placing, the ranking is correct in my opinion (assuming the treasuries are short term). If your are talking capital risk ie default, loss of capital, then no. Honestly I prefer Talebs approach of splitting the assets in a barbell of very low capital risk / high capital risk.

For example, a 52% SCV, 48% Gold portfolio
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52 scv  48  gold.png
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Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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Re: Corporate Bonds

Post by boglerdude » Thu Oct 27, 2022 8:13 pm

That kind of long duration volatility could have a place in a portfolio. Some countries issue 50 years
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Re: Corporate Bonds

Post by Cortopassi » Thu Oct 27, 2022 8:19 pm

My mental ranking was risk of complete loss of capital. My thoughts:

--Individual common stock (Bankruptcy)
--Preferred stock (Bankruptcy)
--Stock ETFs/funds (This should probably be lower on the list because it is a basket of multiple companies and all won't disappear)
--Corp bonds (Bankruptcy, but you are further up in line to get whatever's left)
--Muni bonds (I am assuming most cities/states generally do not declare bankruptcy)
--CDs/Savings accounts (FDIC insured, should be impossible to lose money, except to inflation)
--US Treasuries (full faith and credit, assuming holding to maturity)
--Physical gold (may fluctuate in value but won't go poof, unless some alchemy becomes able to make gold)

But...the barbell is what I am looking to get to. Have enough "safe" investments, social security, gold, US bonds, etc, to allow decently higher risk on the other end.
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Re: Corporate Bonds

Post by Hal » Thu Oct 27, 2022 10:38 pm

Cortopassi wrote:
Thu Oct 27, 2022 8:19 pm
But...the barbell is what I am looking to get to. Have enough "safe" investments, social security, gold, US bonds, etc, to allow decently higher risk on the other end.
Here's a starter I did a while back for Australia. Will be interested to see what you decide on. Not many choices down here, so I am sure you can do better :)
PS: Red star on chart is the PP. Cash would be 1 year Aus Treasury Bond
PPS: And because its raining outside, you get extra.
Port 1 PP, Port 2 50% USA TSM, 30% Gold, 20% Cash, and *drumroll* Port 3 50% SCV, 40% Gold, 10% Cash
All non-PP allocations based on 50% Shares (capital loss risk) 50% (Gold & Cash-hopefully capital safe)
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Re: Corporate Bonds

Post by Cortopassi » Fri Oct 28, 2022 9:53 am

Thanks. I do want the low ulcer index type for sure!

I am happy with my current allocation for the time being, the 79.1% "cash" type holdings are getting an average of 4.73%.

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